For the Second Quarter of 2021
Welcome to the first edition of PwC New Zealand’s M&A Quarterly Update.
In this quarterly publication, we will be providing insights on the latest M&A activity across New Zealand. This first edition covers April - June 2021 and reveals a buoyant deals landscape.
In each edition we will also take a look at key trends in M&A. This quarter we are looking at the impact of closed borders including how technology has affected the deals process and whether or not the developments we’ve seen are here to stay. We also examine the rise of environmental, social and governance (ESG) considerations in New Zealand deal making.
Border restrictions and COVID-19 uncertainty led to a significant reduction in deal activity during 2020. This is outlined in our data which shows New Zealand-based deal activity decreased from 94 deals in 2019 to 46 in 2020.
In 2021, we see that deal activity started slowly during Q1 with only 11 deals completed. However, in Q2 we have seen record deal levels with 47 announced or completed. For a full list of the deals announced and completed in Q2 2021, please see our list below.
Source: MergerMarket, CapitalIQ, Factiva, and Thompson Reuters Eikon and compiled by PwC.
The data shows that deal flow during Q2 this year has been driven by local buyers. We find that 33 of the 47 deals (approximately 70%) completed in this period involved New Zealand buyers. This is a significant jump when compared to 51% in 2019 and 51% in 2020.
Private equity (PE) deals made up 10 of the 47 deals in Q2 2021. This is a similar proportion to previous years. Almost half of the PE activity in the quarter was focused on the TMT sector.
For the second quarter 12 deals were in the TMT sector and 10 in consumer equating to 47% of the total activity. This is closely followed by industrials and chemicals with the leisure sector seeing the least amount of deals.
Environmental, social and governance (ESG) issues are becoming a key feature in New Zealand deal making. A recent PwC global report, Private equity’s ESG journey: from compliance to value creation, examined sustainable investing across the globe and found private equity firms are rapidly maturing in their approach to these issues. In this article, we look at the trend towards ESG in New Zealand and how it creates opportunities for value creation.
Over the past year, ESG has moved from a peripheral to a central factor in assessing strategic positioning. It has also become an important lens for screening investments. Initially driven by the increasing focus on climate-related issues, ESG considerations have now broadened into other areas related to social and governance issues e.g. the health and wellbeing of staff, ethical supply chains, diversity and inclusion.
In New Zealand, business is still relatively early in its ESG transformation journey. However, implementing comprehensive strategies related to these considerations are likely to become mainstream in coming years. With the market and consumers at the forefront of driving change, it will no longer be something companies simply do or don’t do, but rather an integral part of their social license to operate. Businesses will need to address these issues authentically if they are to continue attracting increasingly socially and environmentally conscious consumers and investors, and ultimately avoid value erosion.
Recent buoyant global M&A activity has seen capital flow confidently toward the New Zealand market and local investment opportunities. With it, offshore investment has brought mature and sophisticated ESG policies and expectations. In response, our local approach to ESG in M&A has rapidly evolved. Previously an item checked off in the due diligence phase of a transaction, it is now something being considered at the outset, often as a strategic proposition or licence to operate almost regardless of sector.
ESG is not solely a consideration for energy and transport companies. We are seeing it become relevant across the board, no matter what industry or size of operation. While decarbonisation strategies and climate risks remain a focus, broader environmental considerations such as water use, waste and biodiversity impacts are also being considered. This is alongside a companies’ impact on society from policies and practices such as health and wellbeing of employees, procurement, diversity and inclusion. The broadening of perspectives to a true ESG lens, expands the implications to capture most, if not all, sectors and industries.
One of the most significant and exciting shifts related to ESG has been the recognition of its role in value creation. Rather than seeing it as an area of risk, sophisticated and informed investors have come to understand the value creation opportunity that ESG represents. ESG-led investment strategies such as ‘buy dirty-sell clean’ and targeting leading performers within sectors or categories are examples of proactive mindsets evolving in this space.
Private equity firms have a key role to play. Recent PwC commentary Can private equity save the world? explores how PE can drive transformation. With global private equity assets steadily growing there is even greater opportunity to play an active and constructive role in relation to ESG issues. Through investing sustainably, PE firms can accelerate the trend towards a more widespread adoption of ESG values. For the firms that do, it is a pivotal opportunity to create value and drive returns.
"One of the most significant and exciting shifts related to ESG has been the recognition of its role in value creation."
After the border closures and travel restrictions brought on by COVID-19, many believed deal flow in New Zealand would dry up. But, over a year into the pandemic market activity is buoyant.
Substantial investments are being made, driven by the record levels of liquidity in the market, well-funded banks and private equity firms and strong equity markets. The global economy is awash with capital and investors are hunting for returns in a low interest rate environment. Government stimulus has also played a role in driving confidence.
These conditions have led to significant activity despite buyers and investors never setting foot in New Zealand or meeting vendors face-to-face. In this article, we explore how deal making has changed and the effect it’s having on M&A activity.
Video technology has allowed people to build rapport virtually and is now an integral part of the deal process. Aside from calls, it is being used for Q&As rather than data rooms and pre-produced introductory videos now often accompany information memorandums as a way to tell the story of a business.
Alongside video, other forms of technology are becoming more common. For example we have seen drones used for premise tours and due diligence assignments when people have been unable to attend. Other digital tools such as Power BI and Alteryx are also accelerating the due diligence process.
Technology has streamlined the buy and sell process. Presentations and meetings can be scheduled in a way that doesn’t affect the operating rhythm of a business or take people out for long periods. Multiple meetings can be held at the same time and any issues that arise can be resolved quickly over video calls.
This streamlining has led to deals being completed in a shorter time frame and compressed timetables. Less time has ensured competitive tension between buyers and ultimately resulted in higher value outcomes.
Without people meeting face-to-face there is an even greater focus on building trust between parties. There is growing emphasis on due diligence and data driven insights so businesses can demonstrate and evidence their strategic advantage. This includes producing broader insights for businesses e.g. examining the marketing function, and carrying out financial analysis to support information memorandums (IMs) and financial due diligence (FDDs).
While it’s still too early to understand the full impact of the border restrictions, the efficiency gains made by streamlining the process, and almost completely removing travel time, are hard to ignore. On the other hand, meeting in person is still a good way of building rapport. Because of this, we expect to see a hybrid model that is more flexible than the traditional ways of deal making - a select group might make the trip to New Zealand with others joining meetings by video conference.
While there is currently a pause in the travel bubble, New Zealand businesses with short to medium sale windows had found it beneficial for the deal process. It helped buyers build relationships with investors as it will always be easier to do this face-to-face.
Australia has traditionally been the first stop for local businesses on a growth trajectory and open borders have made it easier for companies to connect with potential distributors.
Australian private equity has long been a substantial driver of investment in New Zealand and local businesses with global appeal are currently in strong demand. Some Australian firms have been keen to take advantage of the open borders by travelling to meet targets early and build relationships. The focus is currently on businesses in robust sectors that have suffered minimal disruption due to COVID-19 as well as those with an export or technology focus.
"Technology has streamlined the buy and sell process. Presentations and meetings can be scheduled in a way that doesn’t affect the operating rhythm of a business or take people out for long periods."
PwC NZ’s Corporate Finance and M&A team is the largest in the country, with a proven track record across a diverse range of sectors. We offer a full range of M&A advisory services including divestments, acquisitions, private equity, capital raisings and strategic relationships.
Our links to the global network of PwC firms provides relationships with key global market participants, and our close relationship with our Australian colleagues ensures a comprehensive understanding of the Australasian marketplace.
Our M&A team has been ranked the number 1 firm for the amount of M&A deals by Thompson Reuters for the last 16 years.